Question

Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $4 trillion while raising only $3 trillion worth of taxes. At a 4 percent rate of interest, how much interest will the government pay each year?

Answer 1

Answer:

$40 billion

Explanation:

Data provided in the question:

Amount spend by government = $4 trillion

Amount raised by Taxes = $3 trillion

Interest rate = 4%

Now,

The bonds to be raised by the government

= Amount spend by government - Amount raised by Taxes

= $4 trillion - $3 trillion

= $1 trillion

or

= $1000 billion

Therefore,

The interest paid by the government each year

= Amount of bonds × Interest rate

= $1000 billion × 0.04

= $40 billion